Op-ed: Taxing broadband—an idea whose time has not come

Pay more for broadband? Not until the current fees are used more effectively.

S. Derek Turner is the research director of Free Press, a nonpartisan organization advocating for universal and affordable Internet access, diverse media ownership, vibrant public media, and quality journalism. The opinions expressed here do not necessarily represent those of Ars Technica.

Don’t like the thought of sending even more of your hard-earned money to the government for corporate welfare? Then take notice: the Federal Communications Commission is considering a bipartisan proposal that would tax your Internet connections and fill the pockets of our nation’s phone companies, even the ones that earn billions in profits while getting their own tax rebatechecks from Uncle Sam.

At issue is how to pay for the Universal Service Fund (USF), a Reagan-era program with the laudable goal of ensuring that rural and low-income Americans have access to affordable communications services. Congress codified the FCC’s existing program in a 1996 law, but left it to the FCC to figure out how to fund the program instead of using general tax revenues.

S. Derek Turner

The FCC decided to adopt fees for long distance phone companies, which all dutifully pass those costs along to their customers in below-the-line charges. (It’s this complicated pass-through that lets the government and your phone company claim this fee isn’t really a “tax.”)

What started as a program with important goals (making sure rural farmers can make phone calls and ensuring the poorest among us can dial 911) turned into an unaccountable corporate slush fund. Today USF is an $8 billion annual program, nearly quadrupling in size since its inception, with the bulk of that increase going to landline and wireless phone companies.

Maybe this massive growth would be no concern if USF were a model program with a sterling reputation for efficiency. Butit’snot. One recent study found that 59 cents of every USF dollar raised for rural networks was spent on administrative expenses and general overhead. A 2010 audit of the rural USF program found that one out of every four dollars sent to participating phone companies was an “overpayment,” with nearly a billion dollars unaccounted for.

The FCC recently adopted somereforms to rural and low-income USF programs, but just this past month the Government Accountability Office noted that the FCC has yet to implement any system for determining each phone company’s actual need for subsidies or any mechanism for tracking the effectiveness of the $8 billion program.

Against this backdrop of an ever-increasing multi-billion dollar corporate subsidy come ongoing calls to overhaul how we pay for the USF. The need for some reform is pretty obvious—mostly because the way the system works today is anything but clear to the average consumer.

Go pull out a recent cell phone bill and look for the line item with a name like “Federal Universal Service Charge.” It will be a few bucks each month, accounting for about 6 percent of the total cost of your voice plan.

The FCC today requires fees only on the interstate revenues of telecommunications service providers (meaning long distance and cell phone carriers), and those companies pass that fee along to you. But because the overall size of USF is growing at a time when these long distance revenues are not, the size of the FCC’s assessment is growing. So this “contribution factor” is about 3 times higher today than it was 15 years ago, meaning that $3 tax on your phone bill used to be $1.

Instead of doing the politically hard work of strengthening the USF by cutting back the amount we toss to the companies feeding at the subsidy trough, politicians like former Democratic Rep. Rick Boucher, regulators like current Republican FCC Commissioner Rob McDowell, and some big companies have called for “expanding the contributions base,” which is DC-speak for adding a USF tax to services like your home broadband connection or smartphone data plan.

AT&T says that “retail mass market broadband Internet access should be included” in the FCC’s tax, and Google “strongly supports expanding the USF contribution base to include broadband Internet access services,” even as it begs the FCC to exempt Google’s own voice telephony services from the USF tax.

Think carefully

Our policymakers should think carefully before creating a new broadband tax. The big concern is that because consumer demand is more sensitive to price increases on emerging services like broadband than established ones like telephone service, a broadband tax could actually undermine adoption in low-income and senior populations, the very people most likely to be disconnected.

Like the rural electrification efforts during the New Deal, the goals of the USF program are noble; we all benefit when more of our fellow citizens are connected. But the FCC needs to focus on making USF more efficient and accountable before it reaches further into our wallets. At the very least, policymakers need to firststudy the impact of a broadband tax before foisting it on consumers.

Ultimately, if Congress wants to put USF on stable ground, it needs to change the law so the program is funded through general treasury revenues, not these regressive taxes.

69 Reader Comments

So this is the plan to destroy the net once and for all. Instead of using gestapo tactics to violate our constitutional rights that have proved unsuccessful it will just be taxed so much only the prestigious elite wealthy scum will have access to information. This country is like Rome before its collapse. Nothing but lies and greed.

So this is the plan to destroy the net once and for all. Instead of using gestapo tactics to violate our constitutional rights that have proved unsuccessful it will just be taxed so much only the prestigious elite wealthy scum will have access to information. This country is like Rome before its collapse. Nothing but lies and greed.

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Id say the complaints against the USF, that it goes to lining the pockets of corporations, that its badly run, that its filled with waste and skimming, that its subject to rent seeking from corporations is most likely true of a great deal of government programs, id say almost all of them.

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

Or, you could just not tax poor people as much. Personally i dont see why anyone making under a $100,000 should have to pay income tax at all (including social security tax). If you really want to help the poor just, start by not hurting them.

Ha! As if AT&T et al weren't already making out like bandits on the highway robbery rates they charge for relatively slow internet service as is. I'm paying AT&T something like $45/month for a lousy 6 meg DSL connection. Now, they want additional subsidies on top of that? The FCC better them to go pound sand.

I can admit it- as I liberal, I think the marginal tax rate of the top 1% is too low, and they should be paying more to support better schools and space programs. On the other hand, if you suggest to me my broadband should be taxed, I turn into a raving, libertarian timber wolf. Maybe it's a little contradictory.

Of course, many farmers are millionaires (at least on paper). They just don't act like it. And ski towns like Aspen, Vail, Taos, and Lake Tahoe are considered rural areas, but there are a surprisingly few number of poor people living there. Yet, the most likely beneficiaries of these programs are rural rich, who should be paying the cost of getting cable/fiber/etc out to their ranch but don't want to.

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

You're a raving commie who hates America and supports the Nazi-Muslin terrorists.

I don't have a problem with a USF in principle -- universal broadband benefits us all, the same way teaching the next generation to read does. But I totally agree with the Op-Ed -- stop screwing around with the money you are collecting now before deciding you need to collect some more.

The last sentence resonated with me. USF sounds like a program to expand/support infrastructure - I don't understand why it isn't funded from the general treasury. I understand it didn't start out that way, but is there any reason it shouldn't be that way today?

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

Or, you could just not tax poor people as much. Personally i dont see why anyone making under a $100,000 should have to pay income tax at all (including social security tax). If you really want to help the poor just, start by not hurting them.

I'm not sure I would consider $100k/year "poor" for the average case.

I don't even make $50k and I don't mind taxes, but what I do mind is the abnormally high waste and administrative overhead of how my taxes are used.

Of course, many farmers are millionaires (at least on paper). They just don't act like it. And ski towns like Aspen, Vail, Taos, and Lake Tahoe are considered rural areas, but there are a surprisingly few number of poor people living there. Yet, the most likely beneficiaries of these programs are rural rich, who should be paying the cost of getting cable/fiber/etc out to their ranch but don't want to.

They're millionaires like I wasn't living below the poverty line while paying my own way through college. That is to say, in no functional means. You can thank, among other luminaries, Monsanta for this situation; they have a hell of a PR department with a talent for selling turds as gold.

I don't have an issue with assigning tax revenues to broadband infrastructure; I would mandate an extreme degree of oversight, though. Or, quite frankly, use it to start building out national infrastructure, starting in low-density areas and moving inward.

More generally, I would like to see all government income* through a single tax (income, sales, whatever) to make it hard to conceal expenditures, and all government spending has to be done through this tax. That way people can readily see what they're actually paying the government, as well as how much they, individually, are giving to each program.

* That is, not direct and non-profitable repayments. If you cut a line because you didn't get 'em marked, it cost $1k to fix, and you paid that amount it wouldn't IMO count. Getting charged $1200 would get someone in deep doodoo.

"Like the rural electrification efforts during the New Deal, the goals of the USF program are noble; we all benefit when more of our fellow citizens are connected."

Im not so sure i agree with this. If i choose to live in a remote area, why should someone else be made to foot the bill for my broadband? Thats part of the tradeoff, remote living gives you fresh air, freedom and no neighbors but it will cost you more to get the services you are used to, like food, power and internet access. Why should someone living in New York pay for my broadband?

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

Your idea has already been done with food stamps, which is called EBT.

The problem with this idea is that the poor are poor for a reason with many not being able to manage their lives or things like money well, so just giving them basically a government credit card and expecting them to manage their expenses just isn't going to happen.

I don't think in the end it really helps the poor to improve their lives in the long run and work to be self-sufficient.

For that I think improving the overall economy, improving competition, and creating more oppotunities for the poor and younger generations to get ahead would do far more benefit than just more taxes and more social programs.

Go get back on topic the USF has not been wisely used, and the FCC should not be allowed to set or manage this fee because it has done a horrible job and the state of broadband is terrible even in most cities. Instead of upgrading and giving americans a world class infrastructure that we deserve and paying for with crap like the USF, companies like verizon have stopped deploying fiber, or implemented caps and limits to ration service.

Broadband is a utility in this country and the government ought to start treating it like it is.

I can admit it- as I liberal, I think the marginal tax rate of the top 1% is too low, and they should be paying more to support better schools and space programs. On the other hand, if you suggest to me my broadband should be taxed, I turn into a raving, libertarian timber wolf. Maybe it's a little contradictory.

Schools are like broadband networks. Throwing more money at them doesn't make them better or help the poor.

I can admit it- as I liberal, I think the marginal tax rate of the top 1% is too low, and they should be paying more to support better schools and space programs. On the other hand, if you suggest to me my broadband should be taxed, I turn into a raving, libertarian timber wolf. Maybe it's a little contradictory.

Schools are like broadband networks. Throwing more money at them doesn't make them better or help the poor.

Throwing money at them does help, it just isn't worth it as most gets wasted in some horrible way.

The last sentence resonated with me. USF sounds like a program to expand/support infrastructure - I don't understand why it isn't funded from the general treasury. I understand it didn't start out that way, but is there any reason it shouldn't be that way today?

This method of funding protects it from congress cutting its funding. Since it doesn't take money from the general treasury, cutting it won't restore money to the general treasury.

I don't think the idea of the USF is a bad one, but obviously the money collected should actually be spent on extending service. This might be a good place to do block grants to the states, let them figure out what will make the most difference in their region. What I'd really like to see is the money spent on running actual cable/fiber out to areas that are not connected, keep them under government ownership but sell access to cable/tel companies, with their costs in part covered by them doing maintenance on the lines.

To me, a much more important issue isn't taxing internet access, rather taxing internet purchases. We need to level the playing field for physical stores vs online fulfillment.

I believe that's in the works, and Amazon is actually helping push the way. They want to make sure it's across the country and implemented in such a way that simplifies the issue. As a result rumors are Amazon will be building out warehouses in just about every state to make deliveries faster.

I agree, that's probably a good idea to add the USF to our broadband bills.

Please tell me this is sarcasm! How can you justify wanting to give more of your money to the Government and Telcos? Unless of course you work for one of those Telcos, and if that is the case you probably don't pay much if anything for your phone/broadband service.

I pay $70 a month for 4.5Mbps, there are already several taxes on my bill. The only way I'd approve of this is if the taxes were going directly to fund national broadband.Anything other than that, is BS.

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

Or, you could just not tax poor people as much. Personally i dont see why anyone making under a $100,000 should have to pay income tax at all (including social security tax). If you really want to help the poor just, start by not hurting them.

I'm not sure I would consider $100k/year "poor" for the average case.

I don't even make $50k and I don't mind taxes, but what I do mind is the abnormally high waste and administrative overhead of how my taxes are used.

I don't even make $50k and I don't mind taxes, but what I do mind is the abnormally high waste and administrative overhead of how my taxes are used.

Which programs specifically are wasteful with high overhead? I know they're out the but when comparing a government program to a private sector counterpart, the gov. usually is more efficient, such as medicare. So yea, everyone complains about waste and abuse but lets start targeting those specific problems instead of just blaming government in general.

"Like the rural electrification efforts during the New Deal, the goals of the USF program are noble; we all benefit when more of our fellow citizens are connected."

Im not so sure i agree with this. If i choose to live in a remote area, why should someone else be made to foot the bill for my broadband? Thats part of the tradeoff, remote living gives you fresh air, freedom and no neighbors but it will cost you more to get the services you are used to, like food, power and internet access. Why should someone living in New York pay for my broadband?

I live in a rural area where I paid >$1500 to have a radio tower built on my property to enable me to get a high-speed internet WAN link. I can afford it, and since my income is tech-related, it made sense for me to do that several years ago. Plus, I was lucky. If I lived only a few miles farther from town I wouldn't have any options above 256k, and that would be $50/month.

However, "we all benefit when more of our fellow citizens are connected" is very true. You're e-mail needs to get delivered whether the recipient is urban or rural. Theoretically, we all benefit the same from internet connections, and there is no great reason why your geography would impact your ISP bill. Being able to communicate benefits both sides of the communications pipeline.

Sure, I'm fine with rural options being reasonably more expensive, but the idea that rural citizens should have to foot 100% of their own infrastructure bills while urban citizens foot 0% of their infrastructure bills is silly. Urbanites rarely realize how much windfall they get simply because they aren't charged individually for their cities gas/fuel/electrical/communications infrastructure. They just pay to hook up to the existing infrastructure, yet they reap the benefits of being able to communicate to all the rural people who had to pay through the nose to get connected.

History has shown that urban subsidization of rural infrastructure benefits us all.

I don't even make $50k and I don't mind taxes, but what I do mind is the abnormally high waste and administrative overhead of how my taxes are used.

Which programs specifically are wasteful with high overhead? I know they're out the but when comparing a government program to a private sector counterpart, the gov. usually is more efficient, such as medicare. So yea, everyone complains about waste and abuse but lets start targeting those specific problems instead of just blaming government in general.

Cite?

If a private sector company was as inefficient and wasteful as most government agencies they would either quickly go bankrupt, layoff most of their employees, or if they are a publicly held company see their stock price drop dramatically.

Show me one company that would survive in the real world with 59% or their revenue going for administrative expenses and general overhead.

We could streamline government by having a poor person discount card universally accepted by vendors. You'd get it based on your tax filing the previous year. New secure card generated every year that could be used for Medicaid as well as food stamps if qualified.

Is this a fascist-socialist idea? Should I join the Gestapo ?

Or, you could just not tax poor people as much. Personally i dont see why anyone making under a $100,000 should have to pay income tax at all (including social security tax). If you really want to help the poor just, start by not hurting them.

*raises eyebrows*

Not sure if I'm just missing the irony here but an annual income of $100,000 is a pretty generous definition of poor. That's not terribly far from our total household income (before tax) and we'd consider ourselves very comfortably off. Granted, having no dependents helps a lot but even with kids we wouldn't exactly be on the breadline.

I don't even make $50k and I don't mind taxes, but what I do mind is the abnormally high waste and administrative overhead of how my taxes are used.

Which programs specifically are wasteful with high overhead? I know they're out the but when comparing a government program to a private sector counterpart, the gov. usually is more efficient, such as medicare. So yea, everyone complains about waste and abuse but lets start targeting those specific problems instead of just blaming government in general.

Cite?

If a private sector company was as inefficient and wasteful as most government agencies they would either quickly go bankrupt, layoff most of their employees, or if they are a publicly held company see their stock price drop dramatically.

Show me one company that would survive in the real world with 59% or their revenue going for administrative expenses and general overhead.

"If a private sector company was as inefficient and wasteful as most government agencies they would either quickly go bankrupt, layoff most of their employees, or if they are a publicly held company see their stock price drop dramatically."

...or they would get a bailout from the government. See Bank of american, Auto industry

I'm sure it will never happen but I'd be in favor of going the other way. Get rid of the USF entirely. Providing phone service to rural areas should be mostly complete. The major cost of running the actual wires should have been done 15+ years that the fund has existed.

If they have to keep the program going or even extend it to broadband it shouldn't be used to help out the existing companies. Instead use it to build government owned/managed infrastructure and allow open access to anyone who wants to use that infrastructure to provide phone/tv/internet/what ever service. That way we as a society are at least getting some meaningful benefit from the fund.